If a compromise does not take place by Jan. 2, sequestration will kick in potentially causing challenges for federal agencies and contractors.

But federal agencies and contractors aren’t just crossing their fingers in the meantime. They’ve made plans to “soften the early effect” of possible sequestration cuts next year, said Deloitte Federal Government Services CEO Robin Lineberger.

In an interview with Off the Shelf’s Roger Waldon, Lineberger noted there could be a “significant slowing of procurement” if sequestration takes place and that agencies are probably “managing their cash right now so that if sequestration were to happen they wouldn’t have over-committed.”

“People hesitate to take action, and, as a result, the government has already slowed down, if you will, the first two months of the year in anticipation or as a contingency from sequestration,” he said.

Sequestration is set to take effect next month — well into the fiscal year. So, agencies will “have to take 100 percent of their cuts over three-fourths of the year,” Lineberger said.

That would put agencies in a situation where “they would have to take the level of spending down below even what they expect in the subsequent year and then move it back up,” he said, which could create a lot of “inefficiency, waste and ineffective activity.”

Contracts slowing, innovation could suffer

Even if Congress and the White House agree on a deal to avert sequestration, any such deal may not necessarily be good news for contractors.

“If sequestration goes away, it means it’s going to be replaced by another law and likely part of a deal to actually bring the spending down to much like the Budget Control Act,” Lineberger said, with only modest contract spending increases, if any.

With or without sequestration, “it’s going to be flat to austere over the next two years,” Lineberger said.

Already, Lineberger said, he has seen a slowing down of contract awards. “I think contractors are reacting. We have seen a number of announcements in the paper, in the media of significant reductions in force, layoffs in part because their businesses (are) slowing but also they’re making a decision to be much more cost-conscious,” he said.

There are two driving reasons for this, according to Lineberger.

The government’s contracting officers are trying to get at some cost efficiencies tied to broader fiscal discipline in a particular event like sequestration. They are trying to squeeze more out of the procurement cycle and, of course, there are challenges with that because agencies can’t overuse its range of products and services that the government buys.

Over the last several years, the market has tightened and the opportunities are fewer.

Lineberger said he is concerned the drive to find cost savings could negatively impact innovation.

“There’s a feeling that the pendulum is swinging back to government-unique procurement approaches rather than commercial-like billing,” Lineberger said. “The more that we drive it that way and regulate it creates a higher market entry barrier for new businesses … migrating their products and services into the federal space.”